The Path to a US-India Trade Deal Lies Through Economic Security

The Diplomat

08-07-2025

A broader trade agreement, including cooperation on key supply chains, foreign investment, and advanced technologies makes a deal more likely and can help the U.S. and India more effectively counter China.
Negotiations for a U.S.-India trade deal have been progressing at breakneck pace, as officials rush to reach an agreement before President Donald Trump's July 9 tariff deadline. India being near the front of the line is surprising, given that the two countries have consistently imposed high trade barriers and haven't signed a deal despite years of discussions.
But Delhi is ready to negotiate because it sees an even bigger geoeconomic play: undercut China's status as a leading manufacturing hub and destination for investment by securing key supply chains and investing in advanced technologies. To seal the deal, Washington and Delhi should put economic security issues at the heart of the agreement.
Getting to yes will require overcoming a long history of nos. In 2019, the U.S. removed India from the Generalized System of Preferences (GSP) program, and India imposed retaliatory tariffs on 28 U.S. goods in response to earlier Section 232 tariffs on steel and aluminum. While mutual tech and defense cooperation increased during the Biden administration, and India joined the non-trade pillars of the Indo-Pacific Economic Framework, there was little progress in improving market access apart from the removal of previous tariffs and resolution of WTO disputes.
Despite Trump's recent optimism, ongoing negotiations for a first tranche deal are facing several hurdles, largely due to U.S. demands for lower trade barriers for steel and agricultural products. The task of lowering tariffs and non-tariff barriers for agriculture is especially politically costly for the Indian government, given that 46 percent of the workforce is involved in agriculture. While still willing to negotiate, Indian officials have signaled their preference for a good deal that puts national interest first rather than just a deal, which may defer discussions on tariffs for key industries and constituencies to a future round of negotiations.
Washington and New Delhi's mutual economic dependence on China presents yet another opportunity for collaboration in national interest. The U.S. and India are reliant on China for a variety of goods, ranging from steel and rare earths to solar cells and pharmaceutical inputs, which are vital for commercial industry as well as national security needs. Recent episodes, including China's export ban on rare earths, have highlighted just how vulnerable their respective economies are to Chinese economic coercion.
This dependence is holding back the U.S.-India economic partnership, and while reducing tariffs and other trade barriers is an important step, addressing the dragon in the room can cement this relationship as 'the defining partnership of the 21st century.' To this end, policymakers must consider deepening cooperation in three core pillars of economic security — securing supply chains, building resilience against foreign economic coercion, and building an allied ecosystem for advanced technologies — to enhance the value of a trade deal and address common security concerns.
Collaboration on supply chains should include sectors critical to economic and national security, and where there is a clear dependence on China. Obvious candidates include pharmaceuticals and critical minerals, where China either manufactures a large proportion of inputs or possesses significant reserves and processing capacity. India is a key supplier of pharmaceutical products to the U.S. but is reliant on China for key starting materials. While India has already introduced incentives to onshore the production of inputs, there is space to coordinate industrial policy with the U.S. to fund the co-production of key starting materials and active pharmaceutical ingredients, or establish a strategic pharmaceutical ingredient reserve. Similarly, India's vast critical mineral reserves (rare earths, cobalt, and graphite) and push for domestic production could provide an opportunity for the U.S. to fund and transfer technology for refining projects in exchange for security of supply agreements.
Building resilience against Chinese economic coercion also includes anticipating and mitigating the risk of Chinese capital in domestic markets while simultaneously filling the gap through bilateral investment. While both countries have robust investment screening frameworks, India has pursued a significantly more restrictive policy toward Chinese FDI since a border clash in 2020. Attitudes in Delhi may be softening, however, as India needs foreign investment to build out domestic manufacturing.
To court investments from the U.S., Indian officials must consider expanding the automatic route for FDI approvals to more sectors, including raising the 74 percent cap for the burgeoning defense industry, and reducing tax rates for U.S. firms investing in target sectors and regions. Although FDI from India pales in comparison to that from China ($4.6 billion vs $28 billion in 2023), Washington should include Indian investment into a proposed CFIUS fast track to ensure it capitalizes on the growth of the world's fourth-largest economy.
To win the global technology race, the U.S. must also look to India, among other allies, to manufacture and adopt advanced technologies. Capturing the market of the world's most populous country, after all, is perhaps the only way to achieve global adoption of tech platforms like AI and quantum based on U.S. IP. The above-mentioned reforms are key to increasing investment and developing secure supply chains, but the core problem of technology and knowledge transfer remains. The scrapping of the 'AI Diffusion Rule' is a step forward in increasing access to advanced chips among partners like India and Singapore, and the Trump administration should prioritize such countries in negotiations relaxing export controls for advanced tech. Given that Washington will be rightfully concerned about the flow of these chips to Russia and Iran, New Delhi should consider increasing resources to the Directorate General of Foreign Trade and customs authorities to better enforce the SCOMET (special chemicals, organisms, materials, equipment, and technologies) list and implementing contractual solutions that impose liabilities on exporters shipping to Russia or Iran.
While the U.S. and India often clash on tariffs and market access, a broader trade agreement including concrete provisions for cooperation on key supply chains, foreign investment, and advanced technologies may help them move past enduring pain points and more effectively counter China's coercive practices.